China Needs to Float Yuan to Avoid Global Recession: Swan

China needs to float its currency in order to minimize financial imbalances that can cause another global recession, Australian Treasurer and Deputy Prime Minister Wayne Swan told CNBC on Tuesday.

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“Australia is a very strong believer in a floating currency,” Swan said. “One of the structural reforms that we require in the global economy, particularly from large developing countries, is for them to boost domestic demand and move to more market based exchange rates.”

Beijing has been widely criticized for keeping its currency artificially low to keep the cost of its exports competitive. The People's Bank of China (PBOC) has engineered several rounds of yuan appreciation against the U.S. dollar since the start of this year, but Washington has been pushing for quicker progress.

Swan, currently in Hong Kong on an official visit with Chinese investors and policy makers, says he is encouraged by China’s push to internationalize its currency.

Last week, the country’s central bank extended the use of the local currency to settle cross-border trade to the entire country. Previously, only 20 provincial regions in China could conduct such settlements.

Yuan settlements in cross-border trade surged to $149.62 billion in the first six months of year — over 13 times more than the same period last year, according to the PBOC.

Australian Budget Surplus

Despite signs of a global economic slowdown, Swan is confident that Australia will deliver a budget surplus in 2012-2013.

“We are determined to do that,” Swan said. “But of course events in the global economy will have consequences for both global growth and also for our budget, but it's too early to tell the size of those impacts.”

“We will update our budget at the normal time in the mid year fiscal and economic outlook, which comes at the end of the year but having a clear, consistent and credible fiscal policy is really important not just for Australia but elsewhere in the world,” he added.